In an opinion following two days of hearings for a lawsuit brought by one of Xerox’s biggest investors, the judge slammed Xerox CEO Jeff Jacobson and the company’s board for approving the deal, calling their arguments “counter-intuitive and not credible.” He granted motions for a preliminary injunction against the deal, a rarity for mergers and acquisitions.

Billionaire Xerox investors Carl Icahn and Darwin Deason have teamed up to fight the deal, which was announced in January, with Mr. Deason filing the suit seeking to block it.

Last year, Xerox’s board had been considering replacing Mr. Jacobson, partly under pressure from Mr. Icahn, and told the CEO to stop negotiating the deal in November, according to documents in the suit that were first reported by The Wall Street Journal. Mr. Jacobson, with a blessing from his chairman, instead raced to strike a complex deal that would leave him in charge and cede control of the American icon to the Japanese company, according to the suit.

“This transaction was largely negotiated by a massively conflicted CEO in breach of his fiduciary duties to further his self-interest and approved by a board, more than half of whom were perpetuating themselves in office for five years without properly supervising Xerox’s conflicted CEO,” Judge Barry R. Ostrager of New York’s Supreme Court in Manhattan said.

The opinion blocks the deal from progressing until the court makes a final determination on the allegations.

Xerox said it would immediately appeal the decision. Both the company and Fujifilm said they disagreed with the judge’s ruling and defended the deal, saying any questions should be settled by a shareholder vote, not the court.

“We strongly believe that all Xerox shareholders should be able to decide for themselves the operational, financial and strategic merits of the transaction,” Fujifilm said in a statement.

Mr. Deason also was seeking to reopen Xerox’s window to allow him to nominate a full slate of directors, joining with Mr. Icahn’s plan to nominate four for the board. The judge on Friday gave Mr. Deason 30 days to propose his slate of directors.

Xerox and Fujifilm had both said Mr. Deason was manipulating facts in the suit. Xerox said Mr. Jacobson wasn’t a rogue executive and that the board ultimately had determined he was the best executive for the job and the deal was the best option on the table.

The judge’s opinion cast doubt on those explanations, saying they weren’t credible and that the chairman shouldn’t have allowed the talks to continue under Mr. Jacobson.

The temporary halting of the deal comes after a Fujifilm spokeswoman said earlier Friday that it planned to revisit the terms of the deal at Xerox’s behest. Currently, the two companies have a joint venture in Asia, of which Fujifilm owns 75% and Xerox 25%. Under the deal, that joint venture would be folded into U.S.-based Xerox, and Fujifilm would own 50.1% of the new Xerox. Current Xerox shareholders would also be paid a $2.5 billion special dividend.

Xerox and Fujifilm have said the deal valued Xerox at a premium and combining the two companies would allow the new company to focus on innovation and new services beyond printers and copiers.

The judge also gave credence to Mr. Deason’s allegations that the deal didn’t give Xerox shareholders a premium, saying “the supposed value proposition of the transaction largely turned on the value of the synergies and the valuation of Fuji Xerox, both of which are highly subjective.”

Mr. Deason, represented by the law firm King & Spalding LLP, said he was “grateful the court acted to protect the shareholders of Xerox.”

“We still have a lot of value to create at Xerox and I intend to focus my efforts there,” he said.

Mr. Icahn wasn’t immediately available for comment.

The deal would require a vote of Xerox’s shareholders, which is likely to come after a vote on Xerox’s board this summer. - (The Wall Street Journal)